Tim Geithner went to market today to sell 30-year bonds, and he got plastered. The interest rate shot up past 4.28%, and it pulled up the rest of the right side of the yield curve. The auction went unexpectedly bad as there were relatively fewer bids than in the past.
Before you rush to say it, no, the Chinese weren't in there buying. But that part is NOT a surprise, because foreigners and central banks generally stick to buying short-dated securities. China stopped buying our long bonds back in 2007.
One of my colleagues reminded me that Britain and Germany had serious failures to sell debt earlier this year. The US Treasury borrows in its own currency, so they have nothing like the constraints that the Germans or the Brits do. At least in theory, the Treasury could borrow at any interest rate necessary to clear the market, because they can print money to pay the interest.
The problem is that if the risk-free rate is extremely high in any particular stretch of the yield curve, it necessarily raises the corresponding interest rates for actual business borrowing, possibly to the point of choking off actual business investment.
But it's funny, because this whole conversation is the kind you'd have in normal times. These aren't normal times. Bank credit is exceptionally scarce at any price, for more than one reason. Geithner is already using coded language that suggests to me that he finds this ultimately acceptable, so long as government entities can create credit themselves.
And at the end of the day, it truly is frictionless for the government to create credit. But the problem is that there will be very few organic market signals for allocating it, which is a fancy way of saying that the economy won't be producing things people actually want to buy.
If nothing changes, then ten years from now, Americans will be telling each other Euro-style things like "I work to live, man, I don't live to work," and "as long as I have what I need and my retirement is guaranteed, I don't really need anything more."
And Obama will get credit for making America a kinder, gentler place. It'll be really boring, though.